James Lockhart Contradicts His Own 2008 Statements on GSE Value

One has to wonder why James Lockhart failed to include his current statements regarding the value of the stocks of the GSE’s when he announced the conservatorship in 2008. Then he said:

From Sept 7th 2008:

Seventh, in order to conserve over $2 billion in capital every year, the common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will continue to remain outstanding. Subordinated debt interest and principal payments will continue to be made.

Am I just missing the “the common and preferred stock are now worthless” comment?

In Lockhart’s fact sheet from 2008 regarding the common stock it said:

Q: What happens to the Company’s stock during the conservatorship?

A: During the conservatorship, the Company’s stock will continue to trade. However, by statute, the powers of the stockholders are suspended until the conservatorship is terminated. Stockholders will continue to retain all rights in the stock’s financial worth; as such worth is determined by the market.

It might just be me but that is MORE that a little different than “the stock is worthless”

On Sept 25th before Congress he said:

I also recognize that many employees at each company have been working extremely hard through years of remediation and through the past year of market volatility. Employees have lost personal savings as a result of the plummet in their company’s stock price and they have been working, and continue to work, long hours in the face of uncertainty. To them, I say thank you and pledge that, as conservator, we share the common goal of stabilizing your company while ensuring it continues to serve its public purpose of providing stability, liquidity, and affordability to the mortgage market.

Um, doesn’t that sound like he was working to stabilize stock prices??? At no point does he ever tell them “your stock is now worthless” . In fact he alludes to the stock price “plummet” and tells them “we share the same goal of stabilizing your company”….

Today he told Reuters:

WASHINGTON (Reuters) – James Lockhart, a former regulator of Fannie Mae and Freddie Mac who is now with private equity firm WL Ross & Co, on Thursday said investors are making “worthless” bets snapping up the stock of the two mortgage finance firms.

As the U.S. Congress debates what to do with the taxpayer-owned companies, some hedge funds have invested aggressively over the past year in Fannie and Freddie, which have returned to profitability after a government rescue in 2008. These investors hope to profit if legislative efforts stall and the government ends up selling its controlling stake.

“It’s a stretch,” said Lockhart, the former chief of the Federal Housing Finance Agency who is now vice chairman at WL Ross. “The stock and the preferred (stock) is worthless and should be worthless,” he told Reuters.

WL Ross & Co is headed by Wilbur Ross, a billionaire investor who has made big profits buying up distressed debt.

Paulson & Co and Perry Capital LLC are among the hedge funds that have bought preferred shares in Fannie Mae and Freddie Mac, which lost almost all their value after regulators seized the companies in 2008.

Lockhart, whose firm is shying away from investing in the two mortgage giants, noted that they would not have survived the financial crisis without a federal bailout.

Investors in the firms are pushing for lawmakers to reconsider plans to wind them down, and have filed lawsuits challenging bailout terms that require the companies to sweep all their profits into the U.S. Treasury as dividends.

Lockhart, who oversaw the $187.5 billion bailout, declined to comment on the litigation. He said, however, that the rescue was designed to be a short-term solution.

Fannie and Freddie have now returned $202.9 billion in dividend payments to the Treasury for the taxpayer aid.

“We have to figure out how to get the private market back into the mortgage market,” said Lockhart. “It’s going to be a question of how to do that without hurting the housing market. Obviously, a lot of that will be up to Congress.”

Lockhart might want to start reviewing his previous comments before opening his mouth. With discovery proceeding in Fairholme’s lawsuit vs Treasury and the FHFA I’m guessing his now contradictory statements might just get him deposed under oath. If he indeed thought the stocks were “worthless” in 2008, why was this not disclosed? Why was it left trading and why did the FHFA itself state the “value would be determined by the market”? Did FHFA intend all along to make the stock worthless? If they did and this was not disclosed, isn’t that securities fraud?

At a bare minimum this is more than enough to let all these cases proceed to trial….

 




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